Thursday, December 30, 2010

New Trade in QQQQ

With Volatility so low and the attitude of complaceny in the market I think that the risk is to the downside. So I am willing to take a low risk high reward play.

I bought 10 Jan '11 $54 puts @ $0.66. There is 22 days until expiration, but I only plan to hold these til next week at the latest.

NG Put sale

On Monday 12/27/10 I sold the JAN4 NG 4.00 strike put for .153, max gain = $1530. We've been going straight up since then and with 27 days still remaining until expiration I'm looking to possibly close this out early for 50% of the maximum gain. I would look to re-enter this same trade or possibly get long the underlying if we pull back towards 4.00.

Update 12/30/10: I had a day order in to close at .076 and it was triggered pre-pit trading hours this morning. So I picked up 50% of the possible gain in 3 days = $770. There are still 27 days left until expiration so I will be looking to re-enter this if given an opportunity. 

Wednesday, December 29, 2010

Low Volatility in crude...I like the strangle!

What a slow week and a half it has been. The major indices continue to make annual highs a few points at a time, which seems like daily. The volume is gone from the market but so is the fear, as measured by the VIX or volatility index. The same is true for oil, after breaking out above $90/bbl the daily range has gotten very narrow and with that the volatility has fallen off a cliff.

First lets take a look at the chart for crude:

First lets take notice of the HV, which is clocking in at 10.32, which represents at least a two year low. We have rallied some 25% off off the June lows and the fear has dissapeared. Looking at both the RSI and the bollinger bands we are either in overbought territory or we are almost there. The bollinger bands are beggining to narror and turn towards each other, indicating a larger move to come in the near future. The overbought/oversold indicators say the next move should be lower, but the 5 and 10 day moving average still indicate that the trend is higher with the 5 day trading above the 10 day moving average.

What about Implied Vol?

As of right now the best tool that I have to measure the implied volatility of oil is to use the OVX which is the CBOE crude volatility index based off the options of the USO. I did however recently read that the CME has released a new product based off of the futures contract and it will be under ticker symble OIV, which I will look at once it gets more established.

But as you can see in the above chart, we have certinaly hit a low in implied volatility and I expect that we could very easily pop back into the 30 to 35 range very easily.

How am I going to play this?

With volatility at these lows, buying premium looks very attactive to me. Which doesn't happen very often as I like to be a net premium seller. But with volatility low and mixed signals as to whether crude continues higher or lowere next...I like the idea of buying a Strangle. Since Feb crude is currently the prompt month with only 16 days left of trading in the options I decided that I wanted to use the March options to strangle crude at the 92.50 call strike and the 91.50 put strike, paying $6.70 for 10 lots.

Here is the trade at initiation:

Take note that the Mar crude contract was trading at 91.94 at the initiation of the trade.

As I said above, I believe that as we enter the new year that we will see a jump in implied volatility by 5 - 10%. Based on this assumption I used the analyze tab to increase vol by 5% and moved time out to next Friday and then 10% out to next Friday.

5% increase in vol and moved time out to next friday 1/7/2011

10% increase in vol and moved time out to next friday 1/7/2011

As far as the price slice selection, I chose the prices that I thought were the most likely targets based on the chart. My first set of targets are 90 on the downside and 94 on the upside and then 87 and 96.

Additionally I also ran the same strategy based on the same price slices but with no increase in implied vol to see what I could expect, and below is what I found:

As of right now I only plan to have this on til next friday. So I am looking at a P&L of somewhere in the following range:

-7,000 to + 25,000

I will update this post next week.

Tuesday, December 28, 2010

DLTR close out

I closed out this long call trade today for a -$60 loss. My stated exit point was on a close below the channel uptrend. I might have jumped the gun on this as we still have 15 minutes left in the trading day, but I don't like that it's violated the channel intra-day four times since I put the trade one, was rejected at resistance since I put the trade on, and looks like it might be consolidating now. So pretty simple, I'm out.

Monday, December 27, 2010

More NG charts

So here are my charts from yesterday and why I was looking to get long NG. We have a series of higher lows after a long 8-month sell off. Considering it is winter, this asset can't go to zero, and I'm comfortable with the margin requirement for taking out a new low, I favored getting long here. But I didn't like the overhead resistance line. Sometime in the next two days one of these trends has to break. So I chose the short put rather than just getting long.

NG Update: WOW!!

What a wild ride. There must have been a large short position out there, or maybe somebody willing to take delivery was bottom feeding and snatching up at this price. Look at the volume and price action in the last 30 minutes of pit trading. I was happy to take a break even and 30 minutes later there was an $800 profit. It could just have easily moved that fast against me so I'm glad to break even here. I did end up selling the FEB 4.000 put option for .153 right as this move occurred potential good timing there. The FEB chart saw the same up move as the JAN so maybe that blows my earlier theory. I haven't been trading this asset class long enough to have an informed opinion.

Now check out this classic technical bounce in the chart below. I had the blue line for the FEB contract drawn before today's action. We bounced exactly on it. I was looking to sell a put in to this move and I did. That was a more conservative approach but a simple long at that support line would have yielded a $1000 profit in a little over an hour. The max gain on my put sale is .153 x $10 = $1530 but I'll have to wait 30 days!!

NG close out

I closed this covered call out for a scratch trade. After commissions it's going to be + $2. The option expires in 20 minutes and the underlying long has to be closed out or rolled by tomorrow at 11:30am PST so I just took the break even here to be done with it. A half hour ago I was facing a -$400 loss so I'll take the break even. I am going to keep an eye on the FEB contract for an entry point near 4.000. I might even sell the 4.000 put.

Thursday, December 23, 2010

PFE close out

I'm manually closing out my long calls on PFE about .04 shy of the GTC I had placed. Classic TA worked on this trade and with it approaching resistance and 29 days left until expiration I'm content to book this profit and look for another entry point.

Trade Update 1/5/11: I wasn't watching the market on Friday 12/31 so I missed a great re-entry point for this trade. Monday morning was too late as we gapped open and I didn't want to chase it. I don't like sitting in front of the screen for 7 hours a day, but this is twice in the last week that not doing so has cost me money.

They say the trend is your friend...

The old saying is the "the trend is your friend". Most technicians live by this saying and would advise others to always trade in the direction of the trend. But how do you define the direction of the trend to fit your trading time frame?

The first thing you can do is look at a chart and based on what you see decide if the underlying is trending up, down, or sideways. You can do this on any time frame. Sometimes it is hard to tell, so people will through moving averages on a chart to help better identify the trend. Some of the most popular are the 50 and 200 day moving averages. In technical terms if the 50 day MA is trading above the 200 day MA, the underlying is said to be in an uptrend and vice a versa. This is great if you are a longer term trader, but what can you use for the active trader who trades week to week, or month to month?

I personally know that I am a short term trader and I need a way to identify the trend this week, not this year. So I started playing with different sets of moving averages and found that for me the 5 and 10 day moving average work best for my time frame. I have found that more often then not, when the 5 day MA is trading above the 10 day MA then we are in a confirmed uptrend and when it is trading below then we are in a confirmed downtrend.

Lets look at a chart for the SPY ETF:

Of the 12 crossings I highlighted in the above chart, 10 were very clear confirmations of the short term trend. And if you were trading based off these signals they would had given you the confidence to stay in the trade much longer then you otherwise might have.

I like this set of moving averages, because you get feedback much soon then you would on a set of larger moving averages.

Do your own research and find out what works best for you!

Wednesday, December 22, 2010

Commodity Roundup - Markets on your Radar

From one of the blogs that I follow.


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via Commodity Trader by Mathew Bradbard on 12/22/10

For nearly 60 years the US dependence on impor...

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MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard President of MB Wealth.

As most followers recognize, I break the commodity markets into seven sectors: financials which include the indices and debt markets, energies, currencies, livestock, metals, grains and finally the softs. So let's examine sector by sector what should be on your radar as we conclude one trading year and a fresh year of opportunity is upon us.

Financials While the first part of the year brought uncertainty and perhaps too much pessimism after a bottom formed in the summer indices have appreciated lifting the Dow and S&P approximately 25%. From here, we think prices have gotten ahead of themselves and expect a 5% depreciation from their current levels. Aggressive clients have started to purchase March ES bear put spreads. Reflecting back on the year, Treasuries have had an inverse relationship to the indices enjoying trade higher in the first half of the year reaching an interim top in the summer and falling off since. The greatest loss has been in Q4, as yields have increased and 30-yr bonds and 10-yr notes have lost considerably. We expect to see a bounce into the new year and have advised aggressive clients to buy dips in 30-yr bonds, 10-yr notes or to position themselves in NOB spreads with their directional bias in the direction of bonds.

Energies There has been a powerful force lifting prices higher in crude oil and the distillates virtually all year and we see no reason for that to change. Continue to use price retracements as buying opportunities as we see $110/115 in Crude by mid 2011. Assuming we are correct with this assumption, both heating oil and RBOB would likely be 20-25% higher as well. Natural gas remains a dog unable to make any significant headway all year. There have been fits and starts but the range bound action for the last six months has been discouraging and lost my clients money on several attempts. From here we may opt to scale into long futures but we would not allocate too many funds and see better opportunities elsewhere.

Currencies From its peak in mid-June the dollar lost 15% followed by a 7% appreciation since early September. From here, there is likely an additional 2-3% upside potential before a slide south resumes sometime in Q1...only my opinion. We rarely trade the dollar but study it to help navigate other trades. Circumstances in Europe have improved but we're far from being out of the woods, so we think there could be more downside in all the European crosses in the coming weeks. If and when we get a correction in commodities, which is long overdue we will look for opportunities to gain bearish exposure in the Loonie, Aussie and Kiwi. As for what's on our radar at the moment, I see nothing pressing in this sector.

Livestock Lean hogs at their current price are in no man's land which essentially means we could go either way from here so we have no long or short interest. Both live cattle and feeder cattle have been trading higher for several months and we expect that pronounced trend to continue. We generally do not trade feeder cattle but we will be advising clients to re-establish longs in live cattle thinking we may see record high pricing in Q1. With rising grain prices and with a number of international markets that had been absent as buyers for several years coming back on line, we feel live cattle could be a great long candidate.

Metals We rarely trade copper but do track its pricing as it serves as one of the best barometers of the health of the overall economy. That being said, at a two-year high and having appreciated over 50% in the last six months I guess the international markets are getting back on their feet. Any significant price change higher or lower in copper should not be ignored. As for the two metals that we are most actively trading for clients in this sector: gold and silver we remain bullish longer term but we do expect some type of price consolidation in the immediate future. Year-to-date gold has appreciated roughly 25% while silver is higher by almost 90%. We expect this tendency to continue with silver continuing to outperform gold for the weeks and months to come. The problem with that is when you're wrong on your trade, silver will prove to be much more volatile, so recognize that when choosing your allocations. Another interesting trade clients have been involved in of late is trading silver against gold at a3:2 ratio. Pick a direction up or down that you expect in the metals and buy or sell silver and then go the opposite direction in gold. We would suggest using a trade back near $1,300 in gold and $27 in silver as buying opportunities.

Grains The trend in corn and soybeans has been higher since the summer lows, while wheat has been sideways for several months. Prices will need to trade higher to entice farmers to allocate more acres to next years crops but we would like to see a break in pricing sometime in the next 30 days to use as a long entry as clients have no exposure currently. We would explore a 30-40 cent correction in '11 corn and would like to see 50-80 cents in '11 soybeans. Until CBOT wheat breaks above $8 or below $6 we have little interest in trading anything but that range for clients. One trade idea to consider is if you think we could get a temporary price setback in either soybeans and/or crude oil aggressive traders may opt to gain bearish exposure in soybean oil. We could see a 5-8% correction over the next several months...again only my opinion.

Softs This sector never gets enough attention from traders but let's look at the scorecard. Both cocoa and sugar reached multi-decade highs this year, coffee is currently trading near a 15-year high, lumber has appreciated 35% off its summer lows and cotton this week traded at a record high. As for current positioning, we're suggesting fading rallies in cocoa thinking we could see 10% depreciation in the coming months. Sugar has very little upside resistance on a trade above 33/34 cents and some traders are calling for 40 cents this year. I am not one of them but this should be on your radar. Cotton is at a record high having gained nearly 45% in the last 30 days. Longs should be looking for an exit door as we've advised clients to start gaining bearish exposure thinking we will see a trade under a $1 in the coming months.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

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Monday, December 20, 2010

New Equity Trades: DLTR, PFE, MO, SPY

I started today with just one position but ended up with seven. In addition to new trades in bond and nat gas futures I also found four equity plays I liked. I kind of started today with a blank canvas and had a number of ideas I found over the weekend I was interested in. A few of them turned out to no longer be available during the trading day today but these four I played.

DLTR This trend is my friend until broken. Even though I feel the market in general is topping or consolidating before future moves higher, there are always individual names that can continue their trend regardless of overall market direction. I hope this is one. In addition to the technical trend, IV is at a 6-month low and earnings are already out of the way. I like the risk/reward of getting long here. I bought the JAN11 50 ITM calls for 6.90 with the stock at 56.70, so paid just .20 time premium. If we break that channel to the downside I would expect IV to increase which would lessen my losses. I would look to exit this trade with a break of the channel. The gold line represents some possible overhead resistance so I might be exiting this trade soon. Some TAs would feel the most recent resistance is a stronger Que than the longer term up-trending channel, but I'll stick with the trend until broken.

PFE This is a similar play to DLTR above. I like the combination of the technical pattern and low IV. In addition, I also like the dividend yield on PFE and consider this trade to be just getting long with no exit point. I bought the JAN11 15 Calls for $2.08 with the stock at $17.06, so paid almost no time premium. If these finish substantially OTM but above 15 I will probably just exercise and get long, then sell covered calls and take the dividend while I wait.

MO Though IV is low on this name as well, I felt I missed the move already and RSI is high so I didn't really want to buy ITM calls. I do like the dividend yield on this name and would like to get long at a lower price, so even though IV is low I went ahead and sold the 25 strike puts for .50. That's still a 2% yield on risk for 30 days on a strong name that I wouldn't mind getting long so I'm comfortable with this trade and will take possession and write covered calls if assigned.

SPY Now since IV is low on just about everything across the board I looked in to buying some VOL. This is rare for me as my psychological profile usually prohibits me from buying premium. However, the markets is suggesting I do so. The total range for the last seven trading days on the SPX has been just 17 points, that's ridonkulous. I bought the Q4 SPY straddle that expires in two weeks. Playing with the analysis tool on TOS, if I can get just a 2% up move in IV and a 10 point move in either direction by the end of the week, this trade breaks even. Now I'm not looking to break even, I'm looking for either a nice 2-4% uptick in VOL and/or a 15-20 point SPX move, but I liked the risk/reward here so I took a shot with a small defined risk of just $660. If this things doesn't perform at all by Thursday morning then I will have to consider closing it out since there is no trading on Friday and I will basically lose two days premium by the end of that day. So Kim Jong Il, make something happen buddy!!

New Trade: ZB

ZB was up to 122'00 earlier today and that represented a 3'00 move off the bottom from just three trading days ago.  Granted we had reached over sold levels and the move down the previous week was also extremely large. However, I just don't see a sustained move up in bond prices and I'm willing to get short if it does, so I sold the JAN11 123 for a little over a point. I would gladly get short at that level anyway so what this does for me is gives me a little pay day in case we don't actually get up there and thus giving me a chance to get short the underlying. I had some good fortune with timing on this as we ended up closing lower on the day and then going even lower in after hours. Since there is still 32 days until this option expires and as of the close I captured over 25% of the possible profit, any further move down will make this a candidate for early exit with an eye on shorting another option on future price increases.

Update 12/29/10: My buy to cover on the original short call was not triggered again today. I decided to short another 123 strike call based on the 2'00 up move today. I'm leaving the buy to cover on the first one at 0'14. With 23 days left to go I'm willing to leave something on the table in exchange for another shot at shorting again as it looks like we might be in a consolidation range now.

New Trade: NG

NG closed near 4.00 on Friday and over the weekend I was looking at the charts and thought it was a good entry point for a long position as it looks like we are seeing higher highs and higher lows. Also, it looks like there is a little buying as we are coming off of near over sold conditions. I used a covered call because it expires in just 7 days and I liked the total return on this trade, assuming it stays above 4.00. I ended up getting lucky with timing and if we open tomorrow any higher I might just take this trade off. I can capture more than 50% of the possible gain in one trading day, we'll see. I  might also consider rolling this to February if we close under 4.00 as right now the contango is only a few points.

Thursday, December 16, 2010


I had a good December due to a two week aggressive short campaign on ZB. I needed a good DEC because I lost money trading the previous two months. Excluding a large realized gain in NOV that had been accumulating since MAR09, the rest of Q4 only adds up to about $3,500 or $1166 per month. My monthly target is a minimum of $2000 so by that measure Q4 was not a success. However, on a longer term basis my realized monthly gain is just above $2800. Below are my results for DEC10 and updated historical records.

Friday, December 10, 2010

Sitting in 100% cash

I took advantage of the no commission on .05 or less at TOS and closed out some short $67.50 puts on KMP today which leaves me with a 100% cash position. This wasn't necessarily by design but rather circumstance. I captured 90% of the potential on this trade so felt comfortable closing it out and looking for reentry for JAN11 on a pull back and/or hopefully some higher IV. Right now with VIX and IV relatively low all around and six weeks to go until JAN11 expiration I'm content to sit back and wait for premium selling opportunities.

Monday, December 6, 2010

Oil is feeling toppy but well supported!

Although I am not able to blog about every trade that I make due to the lack of time...I do from time to time have some time to share what I am doing. The energy complex has seen a pretty nice move since late August when the fed started talking about a second quantitative easing package. This is the third time this year that crude is trading at over $80/bbl, the past few times crude has tried to sustain any rally above $80/bbl it has failed. But this time if seems well supported at $80/bbl and crude has since take out the years highs, to put up numbers we have not seen in over two years.

There is definetly momentum behine the oil trade and in the medium term I think crude has a date with $100, but short term it seems overdone and due for a pullback. So how am I trading this?

1) As per the chart below Oil is looking overbought by way of the bollinger bands, and is almost there on the 14-day RSI. Although it still may have a bit more to climb I think we are approaching a $2-$5 selloff in the coming week and a half. But since I know that oil does not have to correct I am not willing to short crude and I don't really want to pay up for the premium. So instead I want a defined risk trade that has low risk and a high payout if I am right in my forecast. So today I bought 20 89/87/85/83 put condor for 54cts.

Risk = $10,800
Reward = $29,200 (max reward achieved between 85-87)

Ohh...and by the way I chose this strategy knowing that next week was option expiration week.

2) Beyond next week I still think that oil and its related products have some room to run into next year. I have heard so many talking $100 oil again that I think it becomes a self fullfilling prophecy. So I have actually bought $100 calls (low vol and low delta).

But unlike the run we had in 2008 where demand was strong, this rally is off of weak fundementals and I am not sure it will be able to sustain such high prices given teh economic landscape and the record levels of inventory. I tentativly have a plan to buy OTM puts as we get closer to the $100/bbl mark. But I will continue to be nimble and trade what I see in the market place.

Thursday, December 2, 2010

CSCO Trade Update

I had sold short DEC10 19 Puts on CSCO on 11/17. Since then it has sold off a little and more alarmingly has not participated at all in the large overall market move the past two days. So I'm looking to exit this trade at the open on Friday for a small gain.

Do You Really Understand How to Use Market Sentiment and Herd Mentality in Y...


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via Crude Oil Trader by Ray C. Parrish on 12/2/10

We don't know of any trader better suited to teach us how to take advantage of market psychology then Chris Vermeulen of The Gold and Oil Guy.Com. In this report Chris is going to teach you how to read market sentiment so you can day trade and swing trade consistently to earn 3-5% per month trading ETFs. I remember always hearing the pro's say "if you want to make money, you need to trade against the herd (masses)". This sounds easy but just how do we go about doing that? I am about to show you…

In short, you must start looking at the market completely backwards. I focus on buying into heavy volume sell offs (panic) and selling position into heavy volume breakouts (greed). This was a very tough transition for me to make and its best to paper trade it for while until you are comfortable with buying into fear and selling into greed. It will feel completely wrong at the beginning but the profits speak for themselves!

The Four Charts I Follow Closely
The 4 main tools need to make money from trading against the herd. While this is only one of my trading strategies it is my favorite. I trade the ES futures contract and some sometimes the SDS and SSO exchange traded funds. This may seem basic at first glance but when you combine them you end up with a highly effective trading strategy.

SP500 - 5 Minute Chart
Here is a 5 minute chart of the SP500 showing where I went short. It is important to know that over the past 2 years the SP500 has provided a 1.25% profit on average each time one of these extreme sentiment readings occur on the charts.

The red indicator on the chart is a simple volume based indicator which measures fear and greed in the market and is very powerful for picking market tops and bottoms. It's calculated by taking the NYSE up volume and dividing it by the down volume. In short, when you see this indicator start to rise it tells us the majority of traders (the herd) are buying and we should start to look at taking a short position.

Let me show you how to find the trade using the market sentiment....

The NYSE advance/ decline line
Is the most easy to understand. How I use this is simple, when there are 1500+ stocks trading up on the day then the market is getting overbought meaning too many stocks have moved up in a short period of time and traders will most likely start taking profits or exit their positions. I also look at the intraday chart for topping patterns or resistance levels then wait for the other two indicators to confirm Selling Volume on the chart above and the put/call ratio before going short the market.

The last indicator I follow is the put/call ratio
This indicator can be a little tougher to use at times because when the market is trending down the ratio tends to fluctuate near the top or bottom of its range during up or down trends. In a down trend is stays near the top which the chart below shows.

When the broad market bounces and we see the put/call ratio drop into the lower band it's telling me the majority of traders have finally become bullish. This tends to happen once a previous high is broken as it triggers short covering and breakout traders start to buy.

Trading Market Sentiment Conclusion:
All you need to use these indicators, focus on the 15 minute charts, trade only with trend, and take profits at 1%, 2% and keep a small position open for much larger gains.

It is critical that once you take partial profits once you reach a 1% gain then you must start moving your protective stop into the money to lock in a profit for the balance of the position. All three indicators need to reach the extreme levels at the same time for a trade to be triggered. I have seen the market trend in the extreme levels for several weeks continuing to move up day after day and you will get stuck in that situation if you jump the gun entering a trade before each indicator signals an extreme level.

Final thoughts, his strategy works just as well in a bull market but there are some minor changes required on each of the indicators. Also I use inter market analysis following the US Dollar, Gold, Bonds and the Volatility Index for other trading strategies which I incorporate using the market sentiment.

If you would like to get Chris Vermeulen's ETF Trade Alerts for Low Risk Setups checkout his service at The Gold And Oil



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